Meged 5 is alive

A "Globes" guide to the perplexed about Givot Olam oil exploration.

The vague announcement by Givot Olam Oil Exploration LP (TASE:GIVO.L) about production test results at its Meged 5 well near Rosh Ha'Ayin over the past several weeks, confused quite a few investors who are seeking answers to unresolved issues. Evidence of this uncertainty was seen in Givot's partnership units on Thursday, which fell 18% in morning trading before rebounding in the afternoon to end the day down 2% on the opening price.

A number of questions remain open about the company's announcement. To help, "Globes" has produced a guide for perplexed investors.

Who is Givot Olam?

Givot Olam Oil Exploration is a limited partnership founded in 1993, which raised $14 million from the public that year. Over the years, it has focused on developing the Meged oil field. During the 1990s, it drilled the Meged 2 and the Meged 3 wells, reporting signs of oil and natural gas, though ultimately no commercial quantities were found at either site and they were abandoned.

While drilling the Meged 4 well in 2003-04, Givot issued a number of reports which provided somewhat exaggerated figures about the well's potential, citing various assessments. One report said that the site's potential production was 100 million barrels of oil, or 900 barrels per day. In a brutally disappointing end, in October 2005, the company announced the abandonment of this well, too.

Who is behind Givot?

The general partner that manages Givot and makes the operative decisions about the wells, is Givot Olam Oil Ltd., which is owned by the Ben-David family, Givot's chief geologist Tovia Luskin, director Shmuel Laurence Becker, and others.

What is the Meged 5 well?

The Meged 5 well is the fourth well drilled at the Meged field. Givot began drilling Meged 5 in June 2009, initially to a depth of 4,800 meters, and encountered a number of technical problems, which delayed progress. Investors first became truly aware of the well in late December 2009, when the company updated investors that mud from the bore included 60% gas as well as substantial quantities of oil. Investors, fantasizing about a new oil discovery, sent Givot's share price soaring 227% that day, on a huge turnover of NIS 400 million.

The drilling was completed in late January, 2010, and production tests were initiated on May 27th, with the objective of discerning the possible production rate, and finding out whether the discovery was commercial. Since then, Givot has issued a stream of announcements about the results of production tests in different sections of the well bore.

Who is financing the drilling?

Givot is one of the star raisers of capital on the TASE. Since its IPO, it has published 20 prospectuses, on the basis of which it has raised hundreds of millions of shekels.

The initial offerings comprised issues of partnership units to the general public. Subsequent offerings were rights issued to existing investors in the partnership, allowing them to buy more securities. The partnership also issued several series of warrants, the exercise of which injected additional capital into Givot.

To finance the Meged 5 well, Givot Olam raised NIS 70 million in three offerings, while the exercise of the Series 6 through 10 warrants over 2010 injected an additional NIS 10 million into the partnership.

Who are the investors in Givot?

In contrast to many other Israeli public companies, most of whose investors are institutional investors, such as provident and pension funds, most of Givot's investors are private individuals from religious communities, the same communities as Givot's managers.

What does Wednesday's announcement mean?

On Wednesday, Givot announced the summary of results of the production tests conducted to date on six of the well bore's eight sections. It said that in the two weeks prior to the announcement, 3,105 barrels of oil flowed during 189 hours of intermittent flow during the production tests. The figure amounts to an average of 382 barrels of oil a day.

Givot also said that natural gas, equivalent to 90 barrels of oil, was also produced. It added that, on the basis of these results, the general partner concluded that the Meged 5 well was commercially viable, and that it intended to prepare for production.

So what was missing from the notice to the TASE?

A number of material figures are still missing before Meged 5 can be declared a commercial discovery, and to disperse some of the fog surrounding the value of the Meged field. The most important figure is the actual reserves of oil in the field, which is necessary to estimate the quantity of oil in the reservoir.

Secondly, the present production rate has only been tested at one well, and it is quite possible that Givot will decide to produce oil from several wells. The pressure of these wells and the production rate from them are unknown. The partnership has also not disclosed the estimated costs of building the production facilities or the cost of production per barrel of oil.

Givot has also not conducted production tests at sections 7 and 8 of Meged 5, which might provide additional figures about the well.

What might be next at Meged 5?

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Givot said that it will hire outside experts to analyze the findings of the Meged 5 production tests and other information about the Meged oil field. These experts will write a detailed engineering report, which will include a development plan for the field and forecast of its oil and gas reserves. The partnership added that it expects the preliminary findings by August 15 and the full report by September 15.

Who will profit from production, if any profits are made?

If Givot actually produces oil from the Meged field, the government will be eligible to 12.5% royalties on the gross revenue from the sale of the oil. On the basis of Givot's bylaws, its general partner will be eligible to 20.45% royalties, in addition to its fixed management fees. The partnership's remaining profits will be divided among the other partnership unit holders.

How will Meged affect the rest of Israel's oil and gas exploration industry?

Israel's oil and gas exploration industry is currently broken down into two categories: offshore exploration, where significant commercial natural gas discoveries have been made; and onshore exploration, where, with the exception of the Heletz field, no significant oil discoveries have been made.

The success or failure of Meged 5 is unlikely to affect the offshore gas exploration industry. However, a large discovery at Meged 5 could give a big boost to onshore exploration, and cause oil exploration partnerships to accelerate plans. Conversely, failure at Meged 5, or only a small commercial discovery, is liable to make it harder for onshore oil exploration partnerships to raise capital to finance their activity.

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